The Geithner giveaway

JUST WHEN the furor over AIG bonuses reached fever pitch, Treasury Secretary Tim Geithner announced yet another vast transfer of taxpayer money to the wealthy through the latest effort to bail out the Wall Street banks.

Under Geithner's plan, the government will "partner" with private investors to buy up to $1 trillion in mortgages and mortgaged-backed assets.

Essentially, the government is offering to put up $100 billion in cash and loan guarantees that investors would use to purchases delinquent mortgages and bad mortgage-backed assets. If those mortgages and assets eventually pay off, the government and investors split the gains--which is supposed to convince us that this is a fair deal.

But if those so-called toxic assets do turn out to be poison after all, the government is saddled with the losses.

And as if that's not bad enough, the program allows private investors to buy these assets with loans that are guaranteed by the government up to 85 percent of their value. As economist and New York Times columnist Paul Krugman noted on his blog, the loan subsidies will encourage investors to overpay for those assets, since little of their own money is at risk. That, in turn, will be a boon to the banks, which can unload otherwise unsellable mortgage-backed assets at inflated process.

Many liberal economists have argued, rightly, that this approach plays taxpayers--and Obama's base--for suckers. "If I'm right and the mortgages are largely trash, then the Geithner plan is a Rube Goldberg device for shifting inevitable losses from the banks to the Treasury, preserving the big banks and their incumbent management in all their dysfunctional glory," said economist James Galbraith. "This will not achieve the stated goal of bringing on new lending."

The Geithner plan amounts to an unprecedented shift of wealth from the great majority of taxpayers--the working class--to the banks, bondholders and the wealthy. Compared to this, the $165 million in bonuses that AIG executives received in March doesn't even amount to chump change.

Still, those bonuses--coming after $173 billion of taxpayer money had already gone to AIG--rightly stirred popular anger. They have come to symbolize the gross double standards at the core of government policy since the financial crash of last September.

Back then, George Bush's Treasury Secretary Henry Paulson demanded, and eventually received, $700 billion from Congress to purchase the banks' bad mortgage-related securities. The plan was immediately dubbed "cash for trash," and Paulson, an ex-CEO of investment bank Goldman Sachs, was rightly seen as nothing but Wall Street's main operative in the Bush administration.

Public pressure and the rapid spread of the crisis forced Paulson to drop his plan to buy up toxic assets. Instead, the government invested $250 billion directly into the country's nine biggest banks.

But here comes Geithner with a warmed-over version of Paulson's plan. Like his predecessor, Geithner wants to bribe investors to buy up junk assets and guarantee their losses--with your money.

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POPULAR REACTION to Geithner's bank bailout plan could quickly recast political debate in the U.S.

So far, Geithner's boss, Barack Obama, has come across as a Roosevelt-type champion of the people. Obama's liberal rhetoric; progressive budget measures, including higher taxes on the wealthy; and the passage of the economic stimulus program reinforced his popularity.

But when it comes to the financial crisis, Obama's policy is the same one cooked up by the Bush administration's cabal of investment bankers and conservative bureaucrats. And for good reason: Geithner was a prominent member of that cabal.

As president of the Federal Reserve Bank of New York, Geithner helped plan the government takeover of AIG with the help of Paulson and Goldman Sachs CEO Lloyd Blankfein. Is it just a coincidence that Goldman Sachs recently received a $12.9 billion payout from AIG--or rather, from U.S. taxpayers, whose money has simply flowed through AIG on its way to big American and European banks?

Geithner is helping the banks grab even more loot--but now, under the mantle of a "progressive" administration. But this shouldn't be surprising. After all, it was Obama's top economic adviser, Larry Summers, who, as a Treasury official and then treasury secretary under Bill Clinton, who pushed the agenda of financial deregulation that set the stage for today's crisis.

Today, we're told by Geithner that his bailout plan is the only way the financial system can be restored to health. Helping Wall Street, as the cliché goes, means helping Main Street--even though there's no legal obligation under the various bailout proposals for the banks to make new loans.

"Here we are six months after it began, and it's still the case that almost no loans are being made to Main Street," wrote former Labor Secretary Robert Reich. "The Wall Street bailout is starting to look like the most expensive tax-supported fiasco in history. The problem for the Obama administration is that this bailout is near the very center of the president's economic recovery program."

If the banks won't lend, it's because their first move is to shore up their own balance sheets--which includes covering themselves against potential losses from the other banks they do business with. The banks' unwillingness to make loans, in turn, squeezes the "real" economy outside the financial system.

As a result, companies that appeared healthy and profitable yesterday are heading for bankruptcy today as demand dries up, both from cutbacks in business investment and a sharp fall in spending by consumers confronting job losses and debt. On top of that, the entire world economic order is wobbling, as the collapse in consumer spending in the U.S. has slammed economies dependent on exports to American consumers.

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A TRULY bold and progressive administration would confront the problem directly and nationalize the banks.

This would allow the government to toss out self-dealing and overpaid executives, ditch the bad assets, and convert the financial system into a public utility. Take the profit motive away from lending, and investments could be channeled towards urgent social needs.

Rebuilding run-down public schools, replacing old infrastructure and investing in solar power--all these stated goals of the Obama administration could be more easily realized with nationalized banking system. Far more could be accomplished in terms of desperately needed jobs creation programs. And a government takeover of the banks could allow homeowners to refinance mortgages based on current home prices and provide consumers with affordable loans, rather than relying on credit cards with extortionate interest rates.

But Geithner and the rest of Obama's economic team are unwilling to contemplate such proposals. Even as failing financial empires like Citigroup rely on government charity simply to survive, the Obama administration is doing its utmost to preserve the banks as private entities, despite financial stakes that should give the government control. That's what led to the AIG bonus debacle, in which Geithner and other government officials claimed ignorance.

Rather than the government taking control the banks, the opposite seems to be happening, argued Simon Johnson, former chief economist of the International Monetary Fund. As he said on PBS's Bill Moyers' Journal.

The situation we find ourselves in at this moment...is very strongly reminiscent of the situations we've seen many times in other places. But they're places we don't like to think of ourselves as being similar to. They're emerging markets. It's Russia or Indonesia or a Thailand type situation, or Korea.

That's not comfortable. America is different. America is special. America is rich. And yet, we've somehow find ourselves in the grip of the same sort of crisis and the same sort of oligarchs.

The contradiction between rising U.S. government intervention in the banks and their continued private control is so great that more than a few conservatives have joined the crowd calling for nationalization. Even former Federal Reserve Chair Alan Greenspan, a devotee of free-market kook Ayn Rand, argues that the banks should be nationalized.

Of course, Greenspan's vision of nationalization is hardly left wing. His model is AIG, where the government's role is limited to ensuring that wealthy bondholders are repaid in full on the taxpayers' tab. If Greenspan got his way, the nationalized banks would then be re-privatized, with taxpayers left with just the losses.

Greenspan is right about one thing, however. The question isn't just whether the banks should be nationalized, but in whose interests. The AFL-CIO's call for nationalization of the banks, for example, leaves that issue unaddressed.

That's why it's essential for the left to spell out its own vision of nationalization--one that meets workers' urgent needs, starting with debt relief and financing for job creation programs. And with the Republican right braying about Obama's "socialism," it's high time to revive the authentic socialist demand that banks be placed under democratic and social control.

Of course, conservatives--not to mention the Obama administration--would reply that this radical vision is utopian. But it's a far more realistic--and democratic--economic strategy than handing over trillions of dollars of taxpayer money to the same financial barons who presided over the worst economic crisis since the 1930s.

Ultimately, the matter of who benefits from the Obama administration's economic policy will be decided not in congressional hearings or Wall Street boardrooms, but by struggle. The anger over the AIG bonuses is a hint of what is to come. That's why it's urgent for the left and the labor movement to get organized and fight back.